**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-QSB**

 

**Quarterly Report Under Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For thequarterly period ended October 31, 2005**

 

**CommissionFile No. 1-8125**

 

**TOROTEL, INC.**

(Exact name of small businessissuer as specified in its charter)

 
| **MISSOURI**                     | ** ** | **44-0610086**                        |
|----------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of |       | (I.R.S.  Employer Identification No.) |
| incorporation  or organization)  |       |                                  |

 

**620 NORTHLINDENWOOD DRIVE, OLATHE, KANSAS  66062**

(Address of principal executiveoffices)

 

**(913) 747-6111**

(Issuer’s telephone number)

 

**NONE**

(Former name, former addressand former fiscal year, if changed since last report)

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months and (2) has been subject to such filing requirements for the past90 days.

 

Yes   ý     No   o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act.)

 

Yes   o     No   ý

 

As of December 8, there were 5,111,590 shares of Common Stock,$.01 par value, outstanding.

 

 

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TOROTEL, INC. AND SUBSIDIARIES

 

INDEX

 
| PART I.  FINANCIAL INFORMATION                                                         |   |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |
| Item  1.     Financial Statements                                            |   |
|                                                                                                  |   |
| Consolidated Balance Sheet  as of October 31, 2005                                               |   |
|                                                                                                  |   |
| Consolidated Statements of Operations for  the six months ended October 31, 2005 and 2004        |   |
|                                                                                                  |   |
| Consolidated Statements of Operations for  the three months ended October 31, 2005 and 2004      |   |
|                                                                                                  |   |
| Consolidated Statements of Cash Flows for  the six months ended October 31, 2005 and 2004        |   |
|                                                                                                  |   |
| Notes to Consolidated  Financial Statements                                                           |   |
|                                                                                                  |   |
| Item  2.     Management’s Discussion and Analysis or Plan  of Operation |   |
|                                                                                                  |   |
| Item  3.     Controls and Procedures                                         |   |
|                                                                                                  |   |
| PART II.  OTHER  INFORMATION                                                           |   |
|                                                                                                  |   |
| Item  4.     Submission of Matters to a Vote of Security  Holders            |   |
|                                                                                                  |   |
| Item  6.     Exhibits and Reports on Form 8-K                           |   |
|                                                                                                  |   |
| SIGNATURES                                                                                            |   |

 

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PART I.  FINANCIALINFORMATION

 

Item 1.    Financial Statements

 

CONSOLIDATED BALANCE SHEET (Unaudited)

As of October 31, 2005

 
| ASSETS                                            |   |        |      |
|---------------------------------------------------|--------|-------------|-----------|
|                                              |   |        |      |
| Current  assets:                                  |   |        |      |
| Cash                                              |   | $           | 485,000   |   |
| Accounts receivable, net                          |   | 550,000     |      |
| Inventories                                       |   | 446,000     |      |
| Prepaid expenses and other current assets         |   | 50,000      |      |
|                                              |   | 1,531,000   |      |
|                                              |   |        |      |
| Property,  plant and equipment, net               |   | 1,061,000   |      |
|                                              |   |        |      |
| Other assets                                      |   | 15,000      |      |
| Equity  investment                                |   | —      |      |
| Intangible  assets, net                           |   | 733,000     |      |
|                                              |   |        |      |
|                                              |   | $           | 3,340,000 |   |
|                                              |   |        |      |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY        |   |        |      |
|                                              |   |        |      |
| Current  liabilities:                             |   |        |      |
| Current maturities of long-term debt              |   | $           | 79,000    |   |
| Trade accounts payable                            |   | 255,000     |      |
| Accrued liabilities                               |   | 159,000     |      |
| Accrued interest on note payable to  shareholders |   | 5,000       |      |
|                                              |   | 498,000     |      |
|                                              |   |        |      |
| Long-term  debt, less current maturities          |   | 789,000     |      |
|                                              |   |        |      |
| Note payable  to shareholders                     |   | 750,000     |      |
|                                              |   |        |      |
| Stockholders’  equity:                       |   |        |      |
| Common stock, at par value                        |   | 52,000      |      |
| Capital in excess of par value                    |   | 12,362,000  |      |
| Accumulated deficit                               |   | (10,906,000 | )         |
|                                              |   | 1,508,000   |      |
| Less treasury stock, at cost                      |   | 205,000     |      |
|                                              |   | 1,303,000   |      |
|                                              |   |        |      |
|                                              |   | $           | 3,340,000 |   |

 

The accompanying notes are anintegral part of this statement.

 

1

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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Six Months Ended October 31,

 
| ** **                                         | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------------|------------|-----------|------------|-----------|------------|
| Net sales                                          |       | $         | 2,714,000  |      | $          | 2,172,000 |   |
| Cost of  goods sold                                |       | 1,488,000 |       | 1,450,000 |       |
|                                               |       |      |       |      |       |
| Gross profit                                       |       | 1,226,000 |       | 722,000   |       |
|                                               |       |      |       |      |       |
| Operating  expenses:                               |       |      |       |      |       |
| Engineering                                        |       | 122,000   |       | 102,000   |       |
| Selling, general and administrative                |       | 758,000   |       | 562,000   |       |
| Amortization of intangible assets                  |       | 37,000    |       | 36,000    |       |
|                                               |       |      |       |      |       |
|                                               |       | 917,000   |       | 700,000   |       |
|                                               |       |      |       |      |       |
| Earnings from operations                           |       | 309,000   |       | 22,000    |       |
|                                               |       |      |       |      |       |
| Other  expense (income):                           |       |      |       |      |       |
| Interest expense                                   |       | 62,000    |       | 69,000    |       |
| Equity in loss of investee                         |       | —    |       | 76,000    |       |
| Impairment of real estate                          |       | 36,000    |       | —    |       |
| Gain on settlement of debt                         |       | (35,000   | )          | —    |       |
| Gain on sale of real estate                        |       | (110,000  | )          | —    |       |
|                                               |       | (47,000   | )          | 145,000   |       |
|                                               |       |      |       |      |       |
| Earnings (loss) before provision for income  taxes |       | 356,000   |       | (123,000  | )          |
|                                               |       |      |       |      |       |
| Provision  for income taxes                        |       | —    |       | —    |       |
|                                               |       |      |       |      |       |
| Net earnings  (loss)                               |       | $         | 356,000    |      | $          | (123,000 | ) |
|                                               |       |      |       |      |       |
| Basic and  diluted earnings (loss) per share       |       | $         | .07        |      | $          | (.02 | ) |

 

The accompanying notes are anintegral part of these statements.

 

2

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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended October 31,

 
|                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                          |       | $        | 1,447,000  |     | $          | 1,168,000 |   |
| Cost of  goods sold                                |       | 770,000  |       | 771,000  |       |
|                                               |       |     |       |     |       |
| Gross profit                                       |       | 677,000  |       | 397,000  |       |
|                                               |       |     |       |     |       |
| Operating  expenses:                               |       |     |       |     |       |
| Engineering                                        |       | 65,000   |       | 50,000   |       |
| Selling, general and administrative                |       | 403,000  |       | 274,000  |       |
| Amortization of intangible assets                  |       | 21,000   |       | 27,000   |       |
|                                               |       |     |       |     |       |
|                                               |       | 489,000  |       | 351,000  |       |
|                                               |       |     |       |     |       |
| Earnings from operations                           |       | 188,000  |       | 46,000   |       |
|                                               |       |     |       |     |       |
| Other  expense (income):                           |       |     |       |     |       |
| Interest expense                                   |       | 29,000   |       | 35,000   |       |
| Equity in loss of investee                         |       | —   |       | 48,000   |       |
| Gain on sale of real estate                        |       | (5,000   | )          | —   |       |
|                                               |       | 24,000   |       | 83,000   |       |
|                                               |       |     |       |     |       |
| Earnings (loss) before provision for income  taxes |       | 164,000  |       | (37,000  | )          |
|                                               |       |     |       |     |       |
| Provision  for income taxes                        |       | —   |       | —   |       |
|                                               |       |     |       |     |       |
| Net earnings  (loss)                               |       | $        | 164,000    |     | $          | (37,000 | ) |
|                                               |       |     |       |     |       |
| Basic and  diluted earnings per share              |       | $        | .03        |     | $          | — |   |

 

The accompanying notes are anintegral part of these statements.

 

3

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six Months Ended October 31,

 
| ** **                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows  from operating activities:                                                                |       |     |       |     |       |
| Net earnings (loss)                                                                                   |       | $        | 356,000    |     | $          | (123,000 | ) |
| Adjustments to reconcile net earnings  (loss) to net cash provided by (used in) operating activities: |       |     |       |     |       |
| Gain on sale of real estate                                                                           |       | (110,000 | )          | —   |       |
| Gain on settlement of debt                                                                            |       | (35,000  | )          | —   |       |
| Impairment of real estate                                                                             |       | 36,000   |       | —   |       |
| Equity in loss of investee                                                                            |       | —   |       | 76,000   |       |
| Depreciation and amortization                                                                         |       | 72,000   |       | 68,000   |       |
| Change in value of stock appreciation  rights                                                         |       | 16,000   |       | —   |       |
| Increase (decrease) in cash flows from  operations resulting from changes in:                         |       |     |       |     |       |
| Accounts receivable                                                                                   |       | 127,000  |       | (262,000 | )          |
| Inventories                                                                                           |       | (174,000 | )          | (74,000  | )          |
| Prepaid expenses and other assets                                                                     |       | (32,000  | )          | (10,000  | )          |
| Trade accounts payable                                                                                |       | 116,000  |       | (147,000 | )          |
| Accrued liabilities                                                                                   |       | (7,000   | )          | 35,000   |       |
|                                                                                                  |       |     |       |     |       |
| Net cash  provided by (used in) operating activities                                                  |       | 365,000  |       | (437,000 | )          |
|                                                                                                  |       |     |       |     |       |
| Cash flows  from investing activities:                                                                |       |     |       |     |       |
| Capital expenditures                                                                                  |       | (41,000  | )          | (22,000  | )          |
| Net proceeds from sale of asset                                                                       |       | 317,000  |       | —   |       |
|                                                                                                  |       |     |       |     |       |
| Net cash  provided by (used in) investing activities                                                  |       | 276,000  |       | (22,000  | )          |
|                                                                                                  |       |     |       |     |       |
| Cash flows  from financing activities:                                                                |       |     |       |     |       |
| Principal payments on long-term debt                                                                  |       | (349,000 | )          | (26,000  | )          |
|                                                                                                  |       |     |       |     |       |
| Net cash  used in financing activities                                                                |       | (349,000 | )          | (26,000  | )          |
|                                                                                                  |       |     |       |     |       |
| Net increase  (decrease) in cash                                                                      |       | 292,000  |       | (485,000 | )          |
| Cash,  beginning of period                                                                            |       | 193,000  |       | 532,000  |       |
|                                                                                                  |       |     |       |     |       |
| Cash, end of  period                                                                                  |       | $        | 485,000    |     | $          | 47,000 |   |
|                                                                                                  |       |     |       |     |       |
| Supplemental  Disclosures of Cash Flow Information                                                    |       |     |       |     |       |
| Cash paid during the period for:                                                                      |       |     |       |     |       |
| Interest                                                                                              |       | $        | 62,000     |     | $          | 69,000 |   |
| Income taxes payable                                                                                  |       | $        | —     |     | $          | — |   |

 

The accompanying notes are anintegral part of these statements.

 

4

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1 - Basis of Presentation

 

Torotel specializes in the custom design andmanufacture of a wide variety of precision magnetic components, consisting oftransformers, inductors, reactors, chokes and toroidal coils, for use incommercial, industrial and military electronics.  Torotel also designs and distributes ballasttransformers for the airline industry. Approximately 98% of Torotel’s sales during the first half of fiscal2006 have been derived from domestic customers. The accompanying unaudited consolidated financial statements reflect thenormal recurring adjustments, as well as an adjustment to reflect real estateheld for sale to the net realizable value, which in the opinion of managementare necessary to present fairly Torotel’s financial position at October 31,2005, and the results of operations for the six months ended October 31,2005.

 

The financial statements contained hereinshould be read in conjunction with Torotel’s financial statements and relatednotes filed on Form 10-KSB for the year ended April 30, 2005.

 

Note 2 - Inventories

 

The components of inventories are summarizedas follows:

 

| Raw materials    |   | $       | 79,000  |   |
|------------------|--------|---------|---------|--------|
| Work in  process |   | 250,000 |    |
| Finished  goods  |   | 117,000 |    |
|             |   | $       | 446,000 |   |

 

Note 3 – Financing Agreement

 

On September 30, 2005, Torotel Productsrenewed its $200,000 revolving credit agreement with Bank of Blue Valley.  Advances under the credit line are limited to75% of eligible billed receivables.  Therevolving line is collateralized by the land and buildings in Olathe,Kansas.  Under the terms of theagreement, the outstanding balance of the revolving line bears interest at 1.5%over the bank’s corporate base rate and has a maturity date of September 30,2006.  As of October 31, 2005, the effectiveborrowing rate was 8.25% and the entire credit line was available.

 

Note 4 - Employee Stock Options

 

In accordance with the Incentive CompensationPlan approved by shareholders in 1994, Torotel reserved 400,000 common sharesfor issuance to key employees pursuant to the exercise of incentive andnon-qualified stock options granted prior to June 20, 2004.  The options are accounted for under APBOpinion 25, *Accounting for Stock Issued toEmployees*, and related interpretations.  The incentive stock options have a term offive years when issued and vest 50% per year at the end of each of the firsttwo years.  The non-qualified stockoptions have a term of ten years when issued and vest 25% per year at the endof each of the first four years.  Theexercise price of each option equals the market price of Torotel’s

 

5

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common stock on the date of grant. Accordingly, no compensation cost has been recognized for the Plan.

 

The fair value of the incentive stock optionsgranted was estimated on the date of grant using the Black-Scholesoptions-pricing model.  The fair value ofthe options was determined using the following weighted average assumptions: nodividend payments over the life of the options; expected volatility of 551.0%;risk-free interest rate of 3.50%; and expected life of five years.

 

Stock option transactions under the 1994Incentive Compensation Plan for each period through October 31 aresummarized as follows:

 
| ** **                                                      | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|-----------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                                      | ** ** | **Weighted** | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Shares**   | ** ** | **Average**  | ** ** | **Shares** | ** ** | **Average** | ** ** |
| ** **                                                      | ** ** | **Under**    | ** ** | **Exercise** | ** ** | **Under** | ** ** | **Exercise** | ** ** |
| ** **                                                      | ** ** | **Option**   | ** ** | **Price**    | ** ** | **Option** | ** ** | **Price** | ** ** |
| Outstanding  at beginning of period                             |       | 40,000       |       | $            | .37        |   | 40,000 |   | $ | .37 |   |
| Granted                                                         |       | —       |       | —       |       | — |   | — |   |
| Exercised                                                       |       | —       |       | —       |       | — |   | — |   |
| Forfeited                                                       |       | —       |       | —       |       | — |   | — |   |
| Outstanding  at end of period                                   |       | 40,000       |       | $            | .37        |   | 40,000 |   | $ | .37 |   |
|                                                            |       |         |       |         |       |   |   |   |   |
| Options  exercisable at end of period                           |       | 40,000       |       | $            | .37        |   | 40,000 |   | $ | .37 |   |
| Weighted average fair value of options  granted during the year |       |         |       | —       |       |   |   | — |   |

 

The following informationapplies to options outstanding for each period through October 31:

 
| ** **                                   | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|
| Number  outstanding                          |       | 40,000    |       | 40,000    |       |
| Range of  exercise prices                    |       | $         | .37        |      | $          | .37 |   |
| Weighted  average exercise price             |       | $         | .37        |      | $          | .37 |   |
| Weighted average  remaining contractual life |       | 1.00 yrs. |       | 2.00 yrs. |       |

 

Note 5 - Earnings Per Share

 

Statement of Financial Accounting Standards(SFAS) No. 128, *Earnings per Share*,requires dual presentation of basic and diluted EPS on the face of thestatement of earnings regardless of whether basic and diluted EPS are the same;and requires a reconciliation of the numerator and denominator used in computingbasic and diluted EPS.  Basic EPSexcludes dilution and is computed by dividing earnings available to common stockholdersby the weighted average number of common shares outstanding for theperiod.  Diluted EPS is computedsimilarly to fully diluted EPS pursuant to APB Opinion 15.  Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock or resulted in the issuance of commonstock that then shared in the earnings of the entity.  Pursuant to SFAS No. 128, the basic anddiluted earnings per common share were computed as follows:

 

6

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# **Year-to-Date EPS Calculations**

 
| ** **                                   | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|
| Net earnings  (loss)                         |       | $         | 356,000    |      | $          | (123,000 | ) |
| Weighted  average common shares outstanding  |       | 5,111,590 |       | 5,111,590 |       |
| Incremental  shares                          |       | —    |       | —    |       |
|                                         |       |      |       |      |       |
| Basic and  diluted earnings (loss) per share |       | $         | .07        |      | $          | (.02 | ) |

 

No incremental shares are included in the2004 or 2005 year-to-date EPS calculations for the 40,000 shares under optionsince the effect would be anti-dilutive for both periods presented.  There were no anti-dilutive incrementalshares in 2005 because the average market price of the common stock was lessthan the exercise price.

 

Quarterly EPSCalculations

 
| ** **                                   | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------|------------|-----------|------------|-----------|------------|
| Net earnings  (loss)                         |       | $         | 164,000    |      | $          | (37,000 | ) |
| Weighted  average common shares outstanding  |       | 5,111,590 |       | 5,111,590 |       |
| Incremental  shares                          |       | 2,626     |       | —    |       |
|                                         |       |      |       |      |       |
| Basic and  diluted earnings (loss) per share |       | $         | .03        |      | $          | — |   |

 

No incremental shares are included in the2004 quarterly EPS calculations for the 40,000 shares under option since theeffect would be anti-dilutive.

 

Note6 - Amortization of Intangibles

 

Since the acquisition of Electronikaprimarily involved the purchase of certain technology-based intangible assets,annual reviews have been performed to determine the amount of anyimpairment.  The remaining carrying valueof these intangible assets is estimated at $733,000 and is supported by theprojected amount recoverable from the selling shareholders of Electronika (theCaloyeras Family Partnership).  Theselling shareholders contractually guaranteed that the aggregate sales fromElectronika’s existing ballast designs over the first five (5) full fiscalyears, specifically fiscal years 2003-2007, would be at least $2,500,000, whichbased on the terms of the Manufacturing Agreement with Magnetika, Inc.,would result in an aggregate gross profit of $1,500,000 before any operatingexpenses.  Aggregate sales since fiscal2003 have been $1,208,000.

 

The following table provides the adjustedgross carrying value and accumulated amortization for each major class ofintangible asset based on Torotel’s reassessment of previously recognizedintangible assets in accordance with the adoption of Statement of FinancialAccounting Standards No. 142, *Goodwilland Other Intangible Assets*:

 
| ** **          | ** ** | ** **      | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|---------------------|------------|-----------------|------------|--------------|------------|------------------|------------|
| ** **          | ** ** | **Average**     | ** ** | **Gross**    | ** ** | ** **       | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **          | ** ** | **Amortizable** | ** ** | **Carrying** | ** ** | **Accumulated**  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **          | ** ** | **Life**        | ** ** | **Amount**   | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Aircraft - ballasts |       | 3               |       | $            | 1,148,000  |             | $          | 415,000 |   | $ | 1,148,000 |   | $ | 323,000 |   |
|                     |            |                 |            |              |            |                  |            |  |  |  |  |  |  |  |  |

 

The total intangible amortization expense forthe six months ended October 31, 2005 and 2004 was $37,000 and $36,000,respectively.  The estimated aggregateamortization expense for each of the next two years is as follows:

 

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| **April 30,** | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| 2006               |       | $          | 79,000     |   |
| 2007               |       | 63,000     |       |
|               |       | $          | 142,000    |   |

 

Theremaining book value of approximately $628,000 at April 30, 2007,represents the amount recoverable from the former shareholders, and is based onthe estimated sales from the aforementioned ballast designs.

 

Note7 – Stock Appreciation Rights (SARs)

 

On September 10, 2004, the board ofdirectors of Torotel approved the Directors Stock Appreciation Rights Plan (the“Plan”) for non-employee directors.  EachSAR is equal to one share of common stock of Torotel, and the aggregate numberof SARs that may be granted under the Plan shall not exceed 500,000.  The effective date of the Plan is October 1,2004.  The SARs are accounted for underStatement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation.*

 

Pursuant to the Plan, 20,000 SARs weregranted on the effective date to each of the three current non-employeedirectors.  The initial price at whicheach SAR was granted was $.35, which equals the market price of Torotel’scommon stock on the date of grant. Accordingly, no compensation cost was recognized at the time of grant,but compensation costs will be recognized in future periods in which the marketprice of Torotel’s common stock increases above the grant price.

 

SARs shall automatically be granted in thefuture as follows: (1) each person who is elected as a director, who wasnot a director on the effective date of the Plan, shall be granted 10,000 SARson the date such person is elected a director; and (2) on each May 1following the effective date during the term of the Plan, each person servingas a director on such date shall be granted 10,000 SARs.    After the initial grant, the price at whicheach SAR is granted shall be the average of the closing price of Torotel’scommon stock for the ten consecutive days immediately preceding the date ofgrant.  Upon exercise of a SAR, Torotelwill pay the grantee an amount (the “Spread”) equal to the excess of theExercise Price over the SAR grant price multiplied by the number of sharesbeing exercised.  The Exercise Priceshall be the average of the closing price of Torotel’s common stock for the tenconsecutive days immediately preceding the notice of exercise.  For any payments that exceed $10,000, Torotelhas the option to make quarterly payments over three years with interestpayable quarterly at the prime rate of Torotel’s primary bank.

 

Each SAR granted hereunder may be exercisedto the extent that the Grantee is vested in such SAR.  The SARs will vest according to the followingschedule:

 
| **Number of Years the Grantee has  remained** | ** ** | **Shares represented**  | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| **a director of the Company  following**      | ** ** | **by a SAR in which**   | ** ** |
| **the Date of Grant**                         | ** ** | **a Grantee is Vested** | ** ** |
| Under one                                     |       | 0                       | %          |   |
| At least one but less than two                |       | 33                      | %          |   |
| At least two but less than three              |       | 67                      | %          |   |
| Three or more                                 |       | 100                     | %          |   |

## ** **

AGrantee shall become fully (100%) vested in each of his or her SARs under thefollowing circumstances:  (i) upontermination of the Grantee’s service as a director of the Company for reasonsof death, disability or retirement; (ii) if the Compensation andNominating Committee (the “Committee”), in its sole discretion, determines thatacceleration of the SAR vesting schedule would be desirable for theCompany; or (iii) if the

 

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Companyshall, pursuant to action by its Board of Directors, at any time propose tomerge into, consolidate with, or sell or otherwise transfer all orsubstantially all of its assets to another corporation, and provision is notmade pursuant to the terms of such transaction for the assumption by thesurviving, resulting or acquiring corporation of outstanding SARs or forsubstitution of new SARs therefore, the Committee shall cause written notice ofthe proposed transaction to be given to each Grantee not less than twenty daysprior to the anticipated effective date of the proposed transaction, and his orher SARs shall become fully (100%) vested and, prior to a date specified insuch notice, which shall be not more than ten days prior to the anticipatedeffective date of the proposed transaction, each Grantee shall have the rightto exercise his or her SARs.

 

Pursuant to the Plan, 10,000 SARs weregranted on May 1, 2005, at a price of $.302, to each of the three currentnon-employee directors.  SARstransactions for each period though October 31 are summarized as follows:

 
| ** **                                                     | ** ** | **2005**     | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------|------------|--------------|------------|-------------|------------|
| ** **                                                     | ** ** | **Weighted** | ** ** | ** **  | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **SARs**     | ** ** | **Average** | ** ** | **SARs** | ** ** | **Average** | ** ** |
| ** **                                                     | ** ** | **Under**    | ** ** | **Grant**   | ** ** | **Under** | ** ** | **Grant** | ** ** |
| ** **                                                     | ** ** | **Option**   | ** ** | **Price**   | ** ** | **Option** | ** ** | **Price** | ** ** |
| Outstanding  at beginning of period                            |       | 60,000       |       | $           | .350       |   | — |   | — |   |
| Granted                                                        |       | 30,000       |       | $           | .302       |   | 60,000 |   | $ | .350 |   |
| Exercised                                                      |       | —       |       | —      |       | — |   | — |   |
| Forfeited                                                      |       | —       |       | —      |       | — |   | — |   |
| Outstanding  at end of period                                  |       | 90,000       |       | $           | .334       |   | 60,000 |   | $ | .350 |   |
|                                                           |       |         |       |        |       |   |   |   |   |
| SARs exercisable at end of period                              |       | 20,000       |       | $           | .350       |   | — |   | — |   |
| Weighted average fair value of SARs granted  during the period |       |         |       | $           | .550       |   |   |   | — |   |

 

The following information applies to SARs outstanding for each periodthrough October 31:

 
| ** **                                   | ** ** | **2005**      | ** ** | **2004**  | ** ** |
|----------------------------------------------|------------|---------------|------------|-----------|------------|
| Number  outstanding                          |       | 90,000        |       | 60,000    |       |
| Range of  grant prices                       |       | $.302 - $.350 |       | $.350     |       |
| Weighted  average grant price                |       | $.334         |       | $.350     |       |
| Weighted  average remaining contractual life |       | 9.11 yrs.     |       | 9.92 yrs. |       |

 

Totalcompensation expense for the outstanding SARs, as if fully vested, was $19,000and $16,000 for the three and six months ended October 31, 2005,respectively.  The three months ended July 31,2005, included a $3,000 reduction in compensation expense to reduce the relatedliability to zero as the grant price exceeded the exercise price.

 

Note 8 – Gain on Settlement of Debt

 

Other income as presented in the accompanyingconsolidated statements of operations for the six months ended October 31,2005, includes a net gain of $35,000 resulting from the settlement of an oldliability at an amount lower than originally recorded.

 

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Note 9 – Grandview, Missouri Real Estate

 

Prior to moving to Olathe, Kansas in March 2004,Torotel previously occupied a two-building complex with approximately 29,000square feet located in Grandview, Missouri. This property was split into two parcels, one consisting of a 24,000square foot building on a 1.72-acre lot (“Lot No. 1”), and the otherconsisting of a 5,000 square foot building on an .88-acre lot (“Lot No. 2”).  On July 20, 2005, Torotel closed on thesale of Lot No. 2 at a contract price of $225,000.  The sale resulted in net proceeds of $205,000and a net gain of $105,000, which is presented in other income in theaccompanying consolidated statements of operations for the six months ended October 31,2005.

 

Torotel had entered into a real estatecontract to sell Lot No. 1 at a gross selling price of $175,000, withclosing scheduled for no later than September 1, 2005.  Upon completion of the 50-day inspectionperiod, the buyer rescinded his original offer of $175,000 and countered at aprice of $125,000, which Torotel accepted in order to eliminate the costs forreal estate taxes, property and casualty insurance, and utilities.  In doing so, Torotel recorded an impairmentcharge of $36,000, which is presented in other expense in the accompanyingconsolidated statements of operations for the six months ended October 31,2005.  Closing on the sale took place on September 16,2005, with Torotel receiving net proceeds from the sale of  $112,000. The sale resulted in a net gain of $5,000, which is presented in otherincome in the accompanying consolidated statements of operations for the threemonths ended October 31, 2005.

 

Note10 – Concentrations of Credit Risk

 

At various times and at October 31,2005, Torotel maintained cash in bank balances that exceed the federallyinsured limits.

 

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Item2.    Management’sDiscussion and Analysis or Plan of Operation

 

Overview

 

Torotel, Inc. (“Torotel”) conductsbusiness primarily through two wholly owned subsidiaries, Torotel Products, Inc.(“Torotel Products”) and Electronika, Inc. (“Electronika”).  In addition, Torotel has a 15.27% equityinterest in Apex Innovations, Inc. (“Apex”).

 

Torotel Products designs and manufactures awide variety of magnetic components for use in military, aerospace andindustrial electronic applications. These magnetic components, which consist of transformers, inductors,reactors, chokes, and toroidal coils, are used to modify and control electricalvoltages and currents in electronic devices. For example, if equipment containing one of these components receives anelectrical voltage or current which is too high for proper operation of theequipment, the component would modify and control the electrical voltage orcurrent to allow proper operation of the equipment.  While Torotel Products primarily manufacturesthe components in accordance with pre-developed mechanical and electrical requirements,in some cases it will be responsible for both the overall design andmanufacture of the components.  Themagnetic components are sold to manufacturers who incorporate them into an endproduct.  The major applications includeaircraft navigational equipment, voice and data secure communications, medicalequipment, avionics equipment, and conventional missile guidance systems.

 

Torotel Products markets its componentsprimarily through a 3-person internal sales force and three independentmanufacturers’ representatives paid on a commission basis.  In June 2005, Torotel Products added adesign engineer with sales experience (formerly with Standex Electronics) forthe purpose of expanding its reach into new markets and/or customers.  The plan is to have the 4-person engineeringdepartment become more active in the sales and marketing efforts.  An incentive program has been developed inthis regard for all inside sales and engineering personnel to earn a commissionon new product sales to existing, as well as new customers.

 

Torotel Products is an approved source formagnetic components used in numerous military and aerospace systems, whichmeans Torotel Products is automatically solicited for any procurement needs forsuch applications.  The magnetic componentsmanufactured by Torotel Products are sold primarily in the United States, andmost sales are awarded on a competitive bid basis.  The markets in which Torotel Productscompetes are highly competitive.  Asubstantial number of companies sell components of the type manufactured andsold by Torotel Products.  In addition,Torotel Products sells to a number of customers who have the capability ofmanufacturing their own electronic components. The principal methods of competition for electronic products in themarkets served by Torotel Products include, among other factors, price, on-timedelivery performance, lead times, customized product engineering and technicalsupport, marketing capabilities, quality assurance, manufacturing efficiency,and existing relationships with customers’ engineers.  While magnetic components are not susceptibleto rapid technological change, Torotel Products’ sales, which do not representa significant share of the industry’s market, are susceptible to decline giventhe highly competitive nature of the market.

 

Electronika is a marketing and licensingcompany selling ballast transformers to the airline industry.  These transformers activate and control thelights in commercial airplane cockpits. Electronika’s ballast transformers are approved as spare and replacementparts in DC-8, DC-9, DC-10, MD-80, and MD-88 aircraft.  However, sales of ballast transformers havebeen made primarily for use in DC-8 and DC-9 aircraft.  As a result, the business of Electronika issubject to various risks including, without limitation, any decline in use ofthe referenced aircraft, and competition for the available spare

 

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parts business.  Electronika’s sales do not represent asignificant portion of any particular market. Electronika’s requirements for the ballast transformers are outsourcedpursuant to a Manufacturing Agreement with Magnetika, Inc. (“Magnetika”),a corporation owned by Peter B. Caloyeras and his family.  Under the terms of the agreement, Magnetikaprovides all necessary raw material, labor, testing, packaging and relatedservices required to complete the manufacture, delivery and sale of the ballasttransformers.  Electronika retains ownershipof all designs, drawings, specifications and intellectual property rightsassociated with the ballast transformers. Due to lower than anticipated sales for Electronika, the carrying valueof the intangible assets of Electronika is now $733,000.  These intangible assets are being partiallyamortized over the next three fiscal years. At April 30, 2007, the remaining value of the intangible assets isexpected to be approximately $628,000, which will represent the projectedamount recoverable pursuant to the sales guarantee provided by the sellingshareholders of Electronika.  Therecoverable amount will reduce the $750,000 note payable to shareholders, whoare also the owners of Magnetika. Magnetika is a manufacturing company that, in addition to theaforementioned ballast transformers, manufacturers various other productssimilar to those of Torotel for other unrelated customers.  Magnetika’s annual sales are estimated to beapproximately two to three times the annual sales of Torotel.  Total purchases from Magnetika by Electronikaamounted to $36,000 for the six months ended October 31, 2005.

 

Torotel’s management is not involved in thedaily operations of Apex.  Dale H.Sizemore, Jr., Torotel’s chairman and chief executive officer, served as amember of Apex’s board of directors from March 2002 until his resignationin October 2004.  ***i***-**INFO** is Apex’s umbrella term for afoundational system architecture of patented information management softwareproducts created by Apex primarily for government entities.  The success of Apex depends, among otherthings, on its ability to market its products to government entities.  The investment in Apex has no carrying valueon the consolidated balance sheet of Torotel, and in the opinion of Torotelmanagement, it is not likely that any of the investment will be recoveredbecause of Apex’s continued financial losses. If Apex were to become profitable and eventually be sold, any cashrecovered would be recognized as a gain upon receipt of the proceeds.

 

Business Outlook

 

Torotel Products projected an overallincrease in new order bookings of 28% for fiscal year 2006.  The rate of new order bookings during thefirst half of fiscal 2006 was up 115%. The rate for magnetics was up 28%, with the balance of the bookingsincrease represented by a $1,395,000 contract received for the potted coilassembly in May 2005, and a $49,000 order received for two capacitorassemblies, which are new jobs for Torotel Products.  As a result, the order backlog was 48% higherthan a year ago.  The primary factorsthat drive gross profit and net earnings for Torotel Products are sales volumeand product mix.  The gross profits onmature products/programs and larger transformer devices tend to be higher thanthose that are still in the prototyping or early production stages and simplerinductor devices.  As a result, in anygiven accounting period the mix of product shipments between higher and lowermargin jobs has a significant impact on the gross profit and net earnings ofTorotel Products.

 

Electronika’s overall sales will continue tobe impacted by the decline in the number of active DC-8 and DC-9 aircraft.

 

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Results of Operations

 

The following management comments regardingTorotel’s results of operations and outlook should be read in conjunction withthe Consolidated Financial Statements included pursuant to Item 1 of thisQuarterly Report.

 

The discussion and analysis of the results ofoperations include the operations of Torotel, Inc. and its subsidiaries,Torotel Products, Inc. and Electronika, Inc.  While each company’s results are included inthe following discussion, segment reporting is not applicable because theproducts offered are similar in form and function, and target similar markets.

 

Six Months Ended October 31, 2005 ComparedWith Six Months Ended October 31, 2004

 

Net sales increased 25%.  The net sales of Torotel Products increased25% from $2,100,000 to $2,623,000.  Thisincrease is attributable to higher demand for molded coils used in down-holedrilling applications, higher shipments of the potted coil assembly for theHellfire II missile system, higher demand from other segments of the military,and shipments of the new capacitor assemblies. The net sales of Electronika increased 26% from $72,000 to $91,000; however,the current quarter’s sales volume is slightly lower than each of the previousthree quarters, which is representative of the downward trend in Electronika’sales.

 

Gross profit as a percentage of net salesincreased 12%.  The gross profit percentageof Torotel Products increased 12% because of higher sales volume without acomparable increase in fixed production costs, and lower labor costs due tohigher levels of overtime and inefficiencies encountered with the training ofnew production personnel in first half of last year, which was in conjunctionwith the move to Olathe.  Electronika’sgross profit as a percentage of net sales remained unchanged.

 

Engineering expenses, applicable only toTorotel Products, increased nearly 20% from $102,000 to $122,000 because ofhigher payroll costs associated with the hiring of an additional engineer andhigher training costs.  Management doesanticipate an increase in the present level of engineering expenses asadditional training costs are planned.

 

Selling, general and administrative(SG&A) expenses increased 35%.  TheSG&A expenses of Torotel, Inc. increased 143% from $72,000 to $175,000primarily because of additional auditing fees of $32,000 absorbed in the firsthalf of fiscal 2006,  $22,000 incurredfor preparation and mailing of the proxy materials and other costs associatedwith annual shareholders’ meeting, a $16,000 increase in the value of the StockAppreciation Rights granted to non-employee members of the board of directors,a $14,000 increase in professional fees associated primarily with evaluatingthe proposed takeover of Torotel by Peter B. Caloyeras and the Caloyeras FamilyPartnership, a $9,000 increase in directors fees for required board committeemeetings and special telephonic meetings held in conjunction with the proposedtakeover, $7,000 incurred for preparation of documents for electronic filingwith the SEC, and a $3,000 increase in costs for directors and officersliability insurance.  The SG&Aexpenses of Torotel Products increased 20% from $474,000 to $569,000 primarilybecause of higher payroll costs of $29,000, a $25,000 increase in trainingcosts, an $11,000 increase in costs for repairs and maintenance, a $9,000increase in fast-pay discounts taken by certain major customers, a $5,000increase in sales commissions, a $5,000 relocation bonus for a new employee, a$5,000 increase in travel costs, a $4,000 increase in computer software costs,a $4,000 increase in equipment rentals, and a $3,000 increase in advertisingcosts.  These increases were offset by a$5,000 decrease in property taxes.  TheSG&A expenses of Electronika decreased slightly from $16,000 to$14,000.  Management does anticipate anincrease in the present level of SG&A expenses as additional training costsare planned.

 

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Amortization costs, entirely attributable toElectronika, increased slightly from $36,000 to $37,000 (see Note 6 of Notes toConsolidated Financial Statements).

 

Interest expense decreased 10%.  The interest expense of Torotel, Inc.remained unchanged at $26,000.  Theinterest expense of Torotel Products decreased from $43,000 to $36,000 becauseof a lower debt balance.

 

There was no earnings impact in the firsthalf of fiscal 2006 from the investment in Apex.  Equity in loss of investee was $76,000 in theprior year.

 

Impairment of real estate increased $36,000due to reducing the book value of the real estate held for sale in Grandview,Missouri to its contracted price, less estimated selling and closing cost (seeNote 9 of Note to Consolidated Financial Statements).

 

Gain on settlement of debt increased becauseof the $35,000 gain that resulted from the settlement of an old liability at anamount lower than originally recorded.

 

Gain on sale of real estate increased becauseof the $110,000 net gain that resulted from the sale of the real estate parcelslocated in Grandview, Missouri (see Note 9 of Notes to Consolidated FinancialStatements).

 

For the reasons discussed above, theconsolidated pretax earnings increased from a loss of $123,000 to a profit of$356,000.  The pretax loss of Torotel, Inc.decreased from $174,000 to $166,000.  Thepretax earnings of Torotel Products increased from $60,000 to $518,000.  The pretax earnings of Electronika increasedfrom a loss of $9,000 to a profit of $4,000.

 

Three Months Ended October 31, 2005Compared With Three Months Ended October 31, 2004

 

Net sales increased 24%.  The net sales of Torotel Products increased26% from $1,114,000 to $1,404,000.  Thisincrease is attributable to the same reasons as outlined above in theyear-to-date net sales comparison.  Thenet sales of Electronika decreased 20% from $54,000 to $43,000.

 

Gross profit as a percentage of net salesincreased 13%.  The gross profitpercentage of Torotel Products increased nearly 14% because of the same reasonsas outlined above in the year-to-date gross profit comparison.  Electronika’s gross profit as a percentage ofnet sales remained unchanged.

 

Engineering expenses, applicable only toTorotel Products, increased 30% from $50,000 to $65,000 because of the samereasons as outlined above in the year-to-date engineering expenses comparison.

 

Selling, general and administrative(SG&A) expenses increased 47%.  TheSG&A expenses of Torotel, Inc. increased 209% from $33,000 to $102,000primarily because of $22,000 incurred for preparation and mailing of the proxymaterials and other costs associated with annual shareholders’ meeting, a$19,000 increase in the value of the Stock Appreciation Rights granted tonon-employee members of the board of directors, a $17,000 increase inprofessional fees associated primarily with evaluating the proposed takeover ofTorotel by Peter B. Caloyeras and the Caloyeras Family Partnership, a $9,000increase in directors fees for required board committee meetings and specialtelephonic meetings held in conjunction with the proposed takeover, and a$2,000 increase in costs for directors and officers liability insurance.  The SG&A expenses of Torotel Productsincreased 26% from $233,000 to $294,000 primarily because of a $27,000 increasein training costs, higher payroll costs of $13,000, a $9,000 increase inrepairs and maintenance costs, a $5,000 increase in fast-pay discounts taken bycertain major customers, a $4,000 increase in sales commissions, and a $3,000increase in equipment rentals.  TheSG&A expenses of

 

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Electronika decreased slightlyfrom $8,000 to $7,000.  Management doesanticipate an increase in the present level of SG&A expenses as additionaltraining costs are planned.

 

Amortization costs, entirely attributable toElectronika, decreased 22% from $27,000 to $21,000 (see Note 6 of Notes toConsolidated Financial Statements).

 

Interest expense decreased 17%.  The interest expense of Torotel, Inc.remained unchanged at $13,000.  Theinterest expense of Torotel Products decreased from $22,000 to $16,000 becauseof a lower debt balance.

 

There was no earnings impact in the currentquarter from the investment in Apex.  Equity in loss of investee was $48,000 in theprior year’s quarter.

 

Gain on sale of real estate increased becauseof a $5,000 net gain that resulted from the closing on the sale of a portion ofthe real estate located in Grandview, Missouri (see Note 9 of Notes toConsolidated Financial Statements).

 

For the reasons discussed above, theconsolidated pretax earnings increased from a loss of $37,000 to a profit of$164,000.  The pretax loss of Torotel, Inc.increased from $94,000 to $115,000.  Thepretax earnings of Torotel Products increased from $60,000 to $281,000.  The pretax loss of Electronika decreased from$3,000 to $2,000.

 

Liquidity and Capital Resources

 

The table below presents the summary of cashflow for the six-month periods indicated.

 

| ** **                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Net cash  provided by (used in) operating activities |       | $        | 365,000    |     | $          | (437,000 | ) |
| Net cash  provided by (used in) investing activities |       | $        | 276,000    |     | $          | (22,000 | ) |
| Net cash  used in financing activities               |       | $        | (349,000   | )        | $          | (26,000 | ) |

 

Net cash provided by (used in) operatingactivities fluctuates between periods primarily as a result of differences inoperating earnings, the timing of shipments and the collection of accountsreceivable, changes in inventory, level of sales and payment of accountspayable.  The increase in net cashprovided by investing activities is because of the net proceeds of $317,000from the sale of the real estate parcels located in Grandview, Missouri.  Capital expenditures were $41,000 during thefirst half of fiscal 2006.  Management anticipatesapproximately $60,000 in total capital expenditures for fiscal 2006.  Net cash used in financing activities isbecause of payments on long-term debt, most of which came from the proceedsfrom the real estate sales.  Managementbelieves that the projected cash flow generated from operations, combined withits existing cash balances, will be sufficient to meet its funding requirementsfor the foreseeable future.  Torotel doeshave a $200,000 bank line of credit available, which could be utilized to helpfund growth, if required.

 

Management believes that inflation will haveonly a minimal effect on future operations since such effects will be offset bysales price increases, which are not expected to have a significant effect upondemand*.*

 

As stated in Torotel’s 2005 Annual Report toShareholders, Torotel’s board of directors has determined that Return onCapital Employed (“ROCE”) will be the primary tool for managing Torotel’sbusiness.  ROCE is measured by thefollowing formula:

 

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| **Earnings before interest  and taxes (EBIT)** | ** ** | **X**  | ** ** | ** ** | **Net Sales**                         | ** ** | **=   ROCE** |
|------------------------------------------------|------------|--------|------------|------------|---------------------------------------|------------|------------------------|
| Net Sales                                      |       |   |       |       | Net  Operating Assets (NOA)           |
|                                           |       |   |       |       |                                  |
| Measures profit and loss management            |       |   |       |       | Measures  balance sheet management    |
|                                           |       |   |       |       |                                  |
| Profitability%                                 |       |   |       |       | Activity  rating                      |
|                                           |       |   |       |       |                                  |
| Measures how much profit in each dollar        |       |   |       |       | Measures how  much sales is generated |
| of sales                                       |       |   |       |       | from each  dollar of NOA              |
|                                           |       |   |       |       |                                  |
| Quality of Revenue                             |       |   |       |       | Quantity of  Revenue                  |
|                                                |            |        |            |            |                                       |            |                        |  |

 

Simply stated, ROCE measures what you get out (EBIT) versus what youput in (NOA = Capital Employed).  Forthese purposes, NOA is defined as “accounts receivable + inventory + net fixedassets + miscellaneous operating assets – accounts payable – miscellaneousoperating liabilities”.  The performanceof Torotel’s management and the majority of its decisions going forward will bemeasured by whether Torotel’s ROCE improves. In fiscal 2003, 2004, and 2005, Torotel’s ROCE was 3.52%, 1.46% and5.84%, respectively.  At October 31,2005, Torotel’s annualized ROCE for fiscal 2006 is 24.98%.

 

Forward-Looking Information

 

This report, as well as our other reportsfiled with the Securities and Exchange Commission (“SEC”), and in pressreleases and other public communications throughout the year, contains forwardlooking statements made pursuant to the safe harbor provisions of The PrivateSecurities Litigation Reform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,”“plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,” “predict”and similar expressions are intended to identify forward lookingstatements.  This report contains forwardlooking statements regarding, among other topics, our expected financialposition, results of operations, cash flows, strategy, budgets and management’splans and objectives.  Accordingly, theseforward-looking statements are based on assumptions about a number of importantfactors.  While we believe that ourassumptions about such factors are reasonable, such factors involve risks anduncertainties that could cause actual results to be different from what appearhere.  These risk factors include: theability to adequately pass through to customers unanticipated future increasesin raw material costs, impairment of intangible assets and investments,decreased demand for products, delays in developing new products, expectedorders that do not occur, loss of key customers, the impact of competition andprice erosion as well as supply and manufacturing constraints, and other risksand uncertainties.  In light of theserisks and uncertainties, there can be no assurance that the forward-lookinginformation contained in this report will prove accurate, and our actualresults may differ materially from these forward looking statements.  We assume no obligation to update anyforward-looking statements made herein.

 

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Item 3.    Controls and Procedures

 

Torotel’s Chief Executive Officer and ChiefFinancial Officer (collectively, the “Certifying Officers”) are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rule 13a-15(e)) for Torotel. Such officers have concluded (based upon their evaluation of thesecontrols and procedures as of a date within 90 days of the filing of thisreport) that Torotel’s disclosure controls and procedures are adequate andeffective for purposes of Rule 13a-14(c) in timely alerting them tomaterial information relating to Torotel required to be included in Torotel’sfilings with the SEC under the Securities Exchange Act of 1934.  The Certifying Officers also have indicatedthat there were no changes during the period covered by this report in Torotel’sinternal controls over financial reporting or other factors that havematerially affected, or are reasonably likely to materially affect suchcontrols, and there were no corrective actions with regard to significantdeficiencies and material weaknesses.

 

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PART II.                OTHERINFORMATION

 

Item 4.  Submission of Matters toa Vote of Security Holders

 

Asdescribed in Form 8-K filed with the Securities and Exchange Commission(the “Commission”) on September 21, 2005, Torotel convened its annualshareholders’ meeting on September 19, 2005, at its corporate headquartersin Olathe, Kansas.  On the same day, theCaloyeras Family Partnership (NV), LLC (the “Caloyeras Partnership”) filed athird amendment to its joint Schedule 13D (the “13D/A”) filing with theCommission stating that the Caloyeras family was considering its options withrespect to possible amendments to Torotel’s articles and bylaws, the nominationof certain individuals to serve on the Torotel Board of Directors, and thepossible termination of the employment agreements of Torotel’s chief executiveofficer and chief financial officer.

 

Mr. PeterB. Caloyeras, who is the sole shareholder and president of the general partnerof the Caloyeras Partnership, and who has the proxies to vote the Torotelshares owned by the Caloyeras family and certain additional shareholders listedin the 13D/A, and Mr. Basil P. Caloyeras, appeared at the annualshareholders’ meeting and attempted to submit new resolutions for considerationat the annual shareholders’ meeting (collectively, the “Caloyeras Proposal”).  On the grounds that the Caloyeras Proposalwas not properly presented in accordance with the requirements for submittingshareholder proposals for consideration at the annual shareholders’ meeting, asclearly articulated in Torotel’s proxy statement to shareholders filed with theCommission on August 19, 2005, and the Torotel Form 8-K dated April 26,2005, with respect to the annual shareholders’ meeting, Torotel did not permit Messrs. Caloyerasto present the Caloyeras Proposal for a vote of Torotel’s shareholders.  Torotel’s annual meeting procedures requirethat shareholder proposals be submitted in advance so that all shareholdershave advance notice of proposals to be considered at the annual shareholders’meeting.

 

AfterTorotel refused to permit consideration of the Caloyeras Proposal, Messrs. Caloyerasrevoked their proxies and would not vote on any matter to come before theannual shareholders’ meeting.  As aresult, Torotel did not have a quorum for the purposes of continuing the annualshareholders’ meeting under the Missouri General and Business CorporationAct.  Accordingly, the Company adjournedthe annual meeting of shareholders until such time that a quorum may bepresented or represented at such meeting.

 

TheTorotel Board of Directors had further discussions with the CaloyerasPartnership following adjournment of the meeting and at various other times,and understands that the Caloyeras Partnership is considering making a proposalto acquire Torotel if adequate funding can be obtained.  Unless and until the Caloyeras Partnershiphas the financial means to pursue such a transaction, however, the TorotelBoard of Directors does not presently plan to spend additional companyresources or management time to discuss the terms of any proposed transactionwith the Caloyeras Partnership or explore any other strategic alternativesavailable to Torotel.  At this time, theTorotel Board of Directors believes that it is in the best interest of Toroteland its shareholders to continue the employment agreements of Torotel’s chiefexecutive officer and chief financial officer and to focus management time andcompany resources on Torotel’s ongoing business operations.

 

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Item6.   Exhibits and Reports on Form 8-K

 
| a)     | Exhibits                 |                                                                                              |
|--------|--------------------------|---------------------------------------------------------------------------------------------------|
|   |                     |                                                                                              |   |
|   |                     | Exhibit 31.1                                                                                 | Officer  Certification |
|   |                     | Exhibit 31.2                                                                                 | Officer  Certification |
|   |                     | Exhibit 32.1                                                                                 | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |                     | Exhibit 32.2                                                                                 | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |                     |                                                                                              |
| b)     | Reports on Form 8-K | There was one report filed on Form 8-K  during the three months ended October 31, 2005. |
|        |                          |                                                                                                   |  |  |

 

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SIGNATURES

 

In accordance with the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Torotel, Inc.             |
|--------------------------------|
| (Registrant)                   |
|                           |
|                           |
| /s/ Dale H. Sizemore, Jr. |   |
| Dale H. Sizemore, Jr.     |
| Chief Executive Officer        |
| Date: December 9, 2005    |
|                           |
|                           |
| /s/ H. James Serrone           |   |
| H. James Serrone               |
| Chief Financial Officer        |
| Date: December 9, 2005    |

 

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